Loan Losses
A 4.5 billion dollar bank in Wisconsin announced third quarter earnings earlier this month. The earnings were down 48 cents a share from last year. The bank also announced an increase in their quarterly loan loss provision to $2.6 million. This dollar amount represents an increase of $1.1 million versus the same period last year.
I point to this bank simply as an example of the trend within the financial services sector. A slowing housing market, all around softening of the economy and an increase in non-performing assets are the driving factors the bank provided for increasing their loan loss provision. While this is a proactive step that many banks can and should take there are more focused and data driven actions that can mitigate portfolio risk and loss:
- Review and modify Underwriting (UW) policies and guidelines. Most banks - in a rush to capture as large a piece of the pie as possible - modified their UW guidelines during the rapid growth of the last five years. This has led to a sector-wide increase in risk exposure.
- Increase focus and data gathering in the Collection, Workout and Liquidation departments. The Collections department has the earliest exposure to signs of potential problems. It should become common practice that a customer with a late payment of 15 days (or sooner) be contacted.
- Look for trends and common characteristics in liquidated deals. For example, are all liquidated deals concentrated in one region or sector? Do they all have credit scores below a certain level? Equity injection levels...? Once the common characteristics have been identified, they can be used to audit the portfolio to quickly identify deals that may be at risk at a future date.
In short, active management of the portfolio and an increased focus in the servicing department can help reduce anticipated losses.
Shahbaz Shahbazi - ProcessArc, Inc.
